Share-Based Payments

Stock incentive plans

In June 2013, our Board of Directors adopted and, in July 2013 our stockholders approved, the 2013 Stock Incentive Plan, or the 2013 Plan. The 2013 Plan became effective upon the closing of our initial public offering and provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, or RSUs, performance-based stock units, or PSUs, and other stock-based awards. Following the adoption of the 2013 Plan, we granted no further stock options or other awards under the 2007 Stock Incentive Plan, or the 2007 Plan. Any options or awards outstanding under the 2007 Plan at the time of adoption of the 2013 Plan remain outstanding and effective. As of December 31, 2017, the total number of shares reserved under the 2007 Plan and the 2013 Plan are 7,206,938, and we had 1,327,606 shares available for future issuance under the 2013 Plan.

The 2013 Plan provides for an annual increase, to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2015 and continuing until the expiration of the 2013 Plan, equal to the lesser of (i) 2,000,000 shares of common stock, (ii) 4% of the outstanding shares of common stock on such date or (iii) an amount determined by our Board of Directors. On January 1, 2018, the annual increase for the 2013 Plan resulted in an additional 1,953,046 shares authorized for issuance.

Stock options

The following table summarizes the stock option activity of all stock incentive plans for the year ended December 31, 2017.



	Number of Stock Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016	5,218,880		$	46.79	7.28	$	63,559
Granted	1,620,652		51.78
Exercised	(730,478	)	16.42
Forfeited/Expired	(531,492	)	74.48
Outstanding at December 31, 2017	5,577,562		$	49.58	7.27	$	94,336
Exercisable at December 31, 2017	2,936,068		$	44.32	5.98	$	74,229
Vested and expected to vest at December 31, 2017	5,577,562		$	49.58	7.27	$	94,336

The weighted-average grant date fair value of options granted was $35.24, $28.41 and $65.38 during the years ended December 31, 2017, 2016 and 2015, respectively. The total intrinsic value of options exercised was $31.5 million $26.4 million and $50.9 million during the years ended December 31, 2017, 2016 and 2015, respectively.

At December 31, 2017, the total unrecognized compensation expense related to unvested stock option awards was $85.3 million, which we expect to recognize over a weighted-average period of approximately 2.4 years.

Restricted stock units

We may grant awards of RSUs to non-employee directors and employees on a discretionary basis pursuant to the 2013 Plan. Each RSU entitles the holder to receive, at the end of each vesting period, a specified number of shares of our common stock.

The following table presents RSU activity for the year ended December 31, 2017:



	Number of Stock Units		Weighted-Average Grant Date Fair Value
Unvested shares at December 31, 2016	77,050		$	49.60
Granted	66,334		52.23
Vested	(7,500	)	122.22
Forfeited	(10,300	)	39.76
Unvested shares at December 31, 2017	125,584		$	47.46

As of December 31, 2017, there was approximately $2.4 million of total unrecognized compensation expense related to RSUs, which we expect to be recognized over a weighted-average period of 1.2 years.

Performance-based stock options

During the years ended December 31, 2017, 2016 and 2015, no options to purchase shares of common stock that contain performance-based or a combination of performance-based and service-based vesting criteria were granted by us. However, certain performance-based stock options issued in prior periods were still outstanding as of December 31, 2017. Performance-based vesting criteria for options primarily relate to milestone events specific to our corporate goals, including but not limited to certain preclinical, clinical and regulatory development milestones related to our product candidates. Stock-based compensation expense associated with these performance-based stock options is recognized if the performance condition is considered probable of achievement using our management’s best estimates. As of December 31, 2017, all performance-based milestones had been achieved and all expense related to these options has been recorded.

Performance-based stock units

We may grant awards of PSUs to non-employee directors and employees on a discretionary basis pursuant to the 2013 Plan. Each PSU entitles the holder to receive, at the achievement of the performance-based and service-based vesting criteria, a specified number of shares of our common stock. Performance-based vesting criteria primarily relate to milestone events specific to our corporate goals, specifically regulatory milestones related to our product candidates.

The following table presents PSU activity for the year ended December 31, 2017:



	Number of Stock Units		Weighted-Average Grant Date Fair Value
Unvested shares at December 31, 2016	200,613		$	53.36
Granted	18,667		52.75
Vested	—		—
Forfeited	(43,094	)	54.63
Unvested shares at December 31, 2017	176,186		$	52.98

Stock-based compensation expense associated with these PSUs is recognized if the performance condition is considered probable of achievement using our management’s best estimates. As of December 31, 2017, there was approximately $9.3 million of total unrecognized compensation expense related to PSUs with performance-based vesting criteria that are not considered probable of achievement.

2013 Employee Stock Purchase Plan

In June 2013, our Board of Directors adopted, and in July 2013 our stockholders approved, the 2013 Employee Stock Purchase Plan, or the 2013 ESPP. The 2013 ESPP is administered by our Board of Directors or by a committee appointed by our Board of Directors. Under the 2013 ESPP, each offering period is six months, at the end of which employees may purchase shares of common stock through payroll deductions made over the term of the offering period. The per-share purchase price at the end of each offering period is equal to 85% of the closing price of one share of our common stock at the beginning or end of the offering period, whichever is lower, subject to Internal Revenue Service, or IRS, limits. We issued 59,651 shares and 36,680 shares during the years ended December 31, 2017 and 2016, respectively, under the 2013 ESPP. The 2013 ESPP provides participating employees with the opportunity to purchase up to an aggregate of 327,272 shares of our common stock. As of December 31, 2017, we had 213,791 shares available for future issuance under the 2013 ESPP.

Stock-based compensation expense

During the years ended December 31, 2017, 2016 and 2015, we recorded stock-based compensation expense for employee and non-employee stock options, RSUs, performance-based stock options and ESPP shares. Stock-based compensation expense by award type included within the consolidated statements of operations is as follows (in thousands):



	Years Ended December 31,
	2017		2016		2015
Stock options	$	43,997	$	39,305	$	30,331
Restricted stock units	2,858		1,964		902
Performance-based stock options	—		46		341
Employee Stock Purchase Plan	954		771		389
Total stock-based compensation expense	$	47,809	$	42,086	$	31,963

Expenses related to equity-based awards were allocated as follows in the consolidated statements of operations (in thousands):



	Years Ended December 31,
	2017		2016		2015
Research and development expense	$	30,807	$	25,386	$	17,419
General and administrative expense	17,002		16,700		14,544
	$	47,809	$	42,086	$	31,963

No related tax benefits were recognized for the years ended December 31, 2017, 2016 and 2015.

The fair value of each stock option granted to employees is estimated on the date of grant using the Black-Scholes option-pricing model. For non-employees, the fair value of each stock option is estimated on each vesting and reporting date using the Black-Scholes option-pricing model. The following table summarizes the weighted average assumptions used in calculating the grant date fair value of the awards:



	Years Ending December 31,
	2017		2016		2015
Risk-free interest rate	2.05	%	1.42	%	1.71	%
Expected dividend yield	—		—		—
Expected term (in years)	6.05		6.05		6.04
Expected volatility	77.73	%	72.84	%	69.62	%

Expected term

We use the “simplified method” as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share Based Payments, to estimate the expected term of stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the contractual term of ten years and the weighted-average vesting term of the our stock options, taking into consideration multiple vesting tranches. We utilize this method due to lack of historical data and the plain-vanilla nature of our share-based awards.

Volatility

We use a weighted-average of expected volatility based on the volatilities of a representative group of publicly traded biopharmaceutical companies, including ourselves. The expected volatility has been determined using a weighted-average of the historical volatilities of the representative group of companies for a period equal to the expected term of the option grant.

Risk-free rate

The risk-free rate is based on the yield curve of U.S. Treasury securities with periods commensurate with the expected term of the options being valued.

Dividends

We have never paid, and do not anticipate paying, any cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero in the option-pricing model.

Forfeitures

Upon adoption of ASU 2016-09, we elected to account for forfeitures as they occur and, therefore, do not estimate forfeitures.